Here's Why New York's Pension System Is 100% Unsustainable

New York is one of the states at highest risk of default and budget cuts are coming. However, for now, those cuts will be limited to service cuts, dismissals and furloughs. Public sector pensions remain an intractable issue that will move centre stage when states and municipalities in the US realise that they can’t meet budget cuts without making adjustments to gold-plated pension plans. Public sector unions are outraged, the New York Times reports.

In Yonkers, more than 100 retired police officers and firefighters are collecting pensions greater than their pay when they were working. One of the youngest, Hugo Tassone, retired at 44 with a base pay of about $74,000 a year. His pension is now $101,333 a year.

It’s what the system promised, said Mr. Tassone, now 47, adding that he did nothing wrong by adding lots of overtime to his base pay shortly before retiring. “I don’t understand how the working guy that held up their end of the bargain became the problem,” he said.

Mr. Tassone’s ability to draw a pension at 44 which is now more than 25% above his final salary speaks to the problem. The New York Times cite analysts who calculate that state and local officials have made promises worth $5 trillion in public pensions to their employees. However, they have only committed taxpayers to half this amount. This pension disaster makes states and cities into financial basket cases and is the major reason the long-term financial outlook for cities and states is bleak. But, this can go on for a long time. If states and municipalities can close their budget gaps for this year without precipitating a double dip recession, the pro-cyclical nature of budget balances will make the cash flow constraints disappear.

The coming collapse of the municipal bond market is all about those cash flows. When the economy is weak, spending for social programs increases even while tax revenue plummets. These deficits set up another cash flow problem that has to be solved by budget cuts, increased tax rates or both. Given how the shortfalls we are already witnessing, we could be at the breaking point in the next recession. An inability to borrow in the public markets or the federal government’s inability to pay municipal bills would spell the end of the line for pensions like Mr. Tassone’s because cutting those pensions would become critical.

According to pension data collected by The New York Times from the city and state, about 3,700 retired public workers in New York are now getting pensions of more than $100,000 a year, exempt from state and local taxes. The data belie official reports that the average state pension is a modest $18,000, or $38,000 for retired police officers and firefighters. (The average is low, in part, because it includes people who worked in government only part time, or just a few years, as well as surviving spouses getting partial benefits.)

Roughly one of every 250 retired public workers in New York is collecting a six-figure pension, and that group is expected to grow rapidly in coming years, based on the number of highly paid people in the pipeline.

The most breathtaking case in the Times article is that of Edward Stolzenberg, who once ran the Westchester Medical centre, a big hospital in the rich Westchester County suburbs of New York City. His hospital was taken over by the state, bumping his salary way up to $400,000 (even though this was less than in the private sector, remember he was then the county health commissioner – a public official). He now gets over $200,000 in pension salary, while his successor makes $900,000 a year and is due for a pension based on this salary.

Federal tax law does put a cap on pension payouts, currently $195,000 a year. Congress set this cap, which has risen with inflation, more than 30 years ago to keep employers from turning their pension funds into abusive tax shelters.

But New York State found a way around it. In 1997, lawmakers created a safe-harbor mechanism allowing retirees to collect bigger pensions legally — a second pool of money called the Excess Benefit Fund. Towns all over the state pay the associated costs, even though only a few of them have retirees who qualify. At least 28 recipients in New York get pensions above $195,000 a year. One of the highest is George M. Philip, who gets $261,037 after retiring as chief executive and chief investment officer of the New York State teachers’ pension fund. Since retiring, he has gone back to work as president of the State University of New York at Albany, drawing an additional $280,000 last year.